2:48 PM
Mar 09, 2017
 |  BC Innovations  |  Finance

Pharmas learn their A, B, seeds

Analyzing the surge of newco formations involving corporate VCs

Having stepped in to fill the venture funding void after the financial crisis, corporate VCs are emerging as financing engines for new company formation. Driven largely by the flood of interest in immuno-oncology, pharmas are now more active than ever before in fostering the generation of new start-ups.

According to BioCentury’s analysis of seed and A round investors since 2000, the role of corporate investors in newco formation has surged in the past three years, with 2016 marking the highest level yet. From 2014-16, pharma VCs joined seed or series A rounds for 26-31 newcos per year, accounting for up to 30% of the total number of companies raising seed or series A funding during the period, compared with 12-15 at about 14-18% for the prior three years (see “Corporate Backing”).

Figure: Corporate backing

Since the financial crisis in 2008, early stage investments in life science companies by corporate venture arms have risen, with a notable surge in the last three years.

The top panel shows the number of biotech companies that received a seed or series A investment by a pharma company or its corporate venture arm each year since 2000.

The bottom panel shows the percentage of the total number of companies that received seed or series A funding involving a corporate VC, by year.

In 2013, only 15 companies had early stage backing from a corporate VC, accounting for just 13.9% of the total companies that received early stage investments. The number jumped to 26 in 2014 and 27 in 2015, accounting for over 22% each year, and rose to 31 and 29.5% of all seed- and series A-funded companies last year. Source: BCIQ: BioCentury Online Intelligence

“In Boston, I can’t think of a new seed in therapeutics without at least one corporate venture fund involved. Most corporate venture funds play a huge role in start-ups,” said Jens Eckstein, president of GlaxoSmithKline plc’s venture arm SR One.

Novartis AG, Eli Lilly and Co. and Pfizer Inc. have been the most active, participating in 25, 19 and 17, respectively, of the seed and series A rounds documented in BioCentury’s BCIQ database. While investments by Novartis and Lilly are heavily skewed toward cancer, and to a lesser extent, neurology, Pfizer’s investments span the gamut from diagnostics to rare diseases to immuno-oncology.

The upswing in numbers is driven by investments in oncology - another sign of the rush into the field by pharmas looking to bolster their stake, in particular in cancer immunotherapy. Almost every corporate VC shows activity in cancer, and early stage investments in the field far outstrip any other disease area (see “Therapeutic Priorities”).

Figure: Therapeutic priorities

The number of companies with early stage funding from pharma corporate venture arms jumped between 2013 and 2014, with investments in cancer and neurology companies accounting for most of the growth in the last three years.

The chart shows the number of companies operating in each disease area that received seed or series A funding from a pharma or its corporate venture arm each year. Companies operating in multiple disease areas are included in the counts for each area.

While corporate VC interest in biotechs rose across all indications since 2013, the most striking increases were in cancer and neurology. Pharmas and their corporate venture arms only invested in four cancer companies in 2013, which accounts for about 26% of the total number of companies involving corporate VCs that year. The number jumped to 10 companies in 2014; nine in 2015; and 19 in 2016, accounting for over 60% of total corporate VC investments that year. Corporate VCs also invested in only two neurology-focused companies in 2013 but six the following year. Another notable trend is the increased investment in genomics companies. While there were no genomics investments in 2013, five were made in the period 2014-2016. Source: BCIQ: BioCentury Online Intelligence

Last year, almost 60% of the seed and series A investments by corporate VCs were cancer plays, over a third of which were in immuno-oncology. By contrast, in 2013, about 25% of the pharma-backed newcos were in cancer, only one of which was in immuno-oncology.

Less predictably perhaps, neurology takes second place, with 15 between 2014 and 2016. Early stage investments jumped from two companies in 2013 to a peak of six in 2014; the trend looks set to continue with two this year already. That activity is driven by Novartis, Lilly and Biogen Inc., all companies with a therapeutic...

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